On Monday, March 28, electric car giant Tesla announced that it would request approval for the company's common stock split in the form of a stock dividend at its annual shareholders' meeting this year.
Immediately after the news was announced, Tesla jumped 8% and closed at $1091.84. And the recent Tesla rally is very fierce, has been rising for ten consecutive days, up more than 40%.
The stock price soared after the first split
Tesla's most recent stock split took place in August 2020. On August 11, 2020 local time, Tesla announced that it would conduct a 1:5 stock split, and the split-adjusted stock began trading on August 31, 2020, and the trading price was a split-adjusted stock price.
After the announcement of the stock split, Tesla surged 37% in a week, and the stock price approached $1900.
On August 31, Tesla closed up 12.57%, up about 80% from the announcement to the implementation of the stock split (the blue range in the chart below). Since then, Tesla, which has broken down to nearly $400, has continued to soar, gaining 186% in six months (in the orange range below) and breaking through $1,000 again at the end of October last year.
Tesla's stock price performance after the split, source: Investing.com
Large companies pile up to split their shares
Not only Tesla, but also many large companies have recently chosen to split their shares. As early as February this year, Google announced its 1:20 stock split plan, which will take place on July 15 this year.
Since then, Amazon also announced earlier this month that it will carry out a stock split, the same ratio of 1:20, which is expected to take place on May 25. It was also Amazon's first stock split since 1999.
A large part of the reason why these large companies choose to split their shares is that the stock price is too high, Google's current price is $2829.11, Amazon's price is $3379.81, and Tesla's stock price is not so high, but the stock price is also over a thousand yuan, reaching $1091.84. The excessively high stock price makes many small investors lament that it is really "unattainable".
In fact, Tesla has long mentioned in the financial report released in February this year that it will regularly seek and obtain shareholder approval to increase the number of equity incentives and rewards in the stock purchase plan available to employees.
After the stock split, the liquidity of Tesla's stock has been greatly improved, the stock price has also been adjusted to a relatively low level, and the rising expectations brought by the stock split will be more in line with Tesla's interests in employee incentives.
The benefits of splitting up shares
Split shares, also known as split. In the stock and securities market, a split is the exchange of a stock with a higher denomination for several shares with a lower denomination, but it is not a dividend.
After the stock split, the number of shares outstanding increases, the par value per share decreases, and the surplus per share decreases; the company value, the total amount of shareholders' equity, the amount of shareholders' equity and the amount of each item and their proportions remain unchanged.
For companies, the main purpose of stock splitting is to reduce the price per stock by increasing the number of shares, thereby attracting more investors. For shareholders, the number of shares held by each shareholder increases after the stock split, but the shareholding ratio and the total value of the shares held remain unchanged. If the decline in the cash dividend per share after the stock split is less than the stock split, the shareholder can still get more cash dividends, and the favorable information and reduced stock price transmitted by the stock split to the society may lead to an increase in the number of people who buy the stock, which in turn will increase its price, thereby increasing the wealth of shareholders.
Tesla's stock price is already high, and the cheap stock price after the split is more attractive to the market.
Will history repeat itself?
In the past, Tesla rose nearly 80% shortly after the last stock split, so will the stock price rise after this stock split?
Monday's sharp rise in stock prices has shown the confidence of the market, and Tesla's momentum of ten consecutive days of rising is also unstoppable. However, it should be noted that after Tesla's first stock split, the cheap stock price met the requirements for inclusion in the S&P 500 index, and Tesla was officially included in the S&P index on December 21.
Tesla's market capitalization at the time was $659 billion, equivalent to a 1.6% weighting on the S&P 500. That means index funds will need to buy about $83 billion in Tesla stock, or 13 percent of its total liquidity. That said, including the S&P index brought Tesla more than $80 billion in buying. And this is what this stock split did not have.
In addition, according to InvestingPro's model, Tesla's fair value is $823.47, about 24.6% lower than the current stock price. Wall Street analysts have a price target ranging from $250 to $1580, with an average price target of $950.11.
However, Tesla's financial health is better, with a composite score of 4 out of 5.
Tesla Fair Value, Source: InvestingPro
End
Tesla's stock split will undoubtedly be positive for the stock price. Now the electric vehicle industry is continuing to stimulate the imagination of small and medium-sized investors, Tesla's high price of more than 10 million US dollars is a bit "out of reach". Therefore, increasing the number of shares can reduce the "entry threshold" for retail investors and facilitate the continued push up of the company's market value.
It should be noted that the share split is subject to the approval of the board of directors, but Tesla has not yet announced the date of this year's annual shareholders' meeting. Whether this year's shareholders' meeting can return to the summer is still in doubt.
In addition, Tesla's valuation is already a bit high, investors also need to pay attention to the risk of chasing high, there is a strong resistance above $1200.
Author: Pan Yiheng